Margo Thorning, senior vice president and chief economist with the American Council for Capital Formation, takes on the Center for American Progress' claim that the oil and gas industry’s earnings are too high. In her column below, Thorning says, "It’s becoming a quarterly tradition as reliable as the seasons: the oil sector releases its earnings, and the Center for American Progress contorts itself into a misleading critique of the industry, its tax treatment, and its outsized role in the American economy."

Thorning further explains the capital investment required by the oil and gas sector, clarifies the Section 199 deduction and dual capacity tax treatments, and counters CAP's "attack on energy exports."

"The oil and gas industry sports the highest average effective tax rate on the S&P index. The sector supports 10 million jobs, and continues to create new jobs at a breakneck pace. It’s time to move past talking points and start dealing in facts," says Thorning.

It’s becoming a quarterly tradition as reliable as the seasons: the oil sector releases its earnings, and the Center for American Progress contorts itself into a misleading critique of the industry, its tax treatment, and its outsized role in the American economy.

Unfortunately, repetition has not made CAP’s argument any more factual, any more persuasive, or any more founded in the common sense tenets that make for sound energy and tax policy.

The crux of CAP’s argument is, as ever, that the oil and gas industry’s earnings are too high. And because of these high earnings, the oil and gas industry should be taxed more heavily. They assert that the oil sector fails to carry its share of the burden, that it is a drain on the economy, and that policymakers should act in a manner that artificially shifts the American energy portfolio away from traditional fossil energy and toward preferred, “green” energy projects.

Not a single aspect of this line of reasoning holds water.

Earnings, Expenses, and Returns

Let’s start with the earnings. Earnings in 2013 for the “Big Five” oil companies clocked in at $93 billion – an objectively large number, but around thirty percent lower than last year. How does that figure stack up against the level of investment required? And how profitable is the sector?

Among the most capital intensive enterprises in the modern economy, oil and gas production occurs on a global scale and requires immense investment. And the cost of conducting this business is growing even more imposing as recoverable reserves grow more difficult to reach, and supply becomes more difficult to replace. A recent Wall Street Journal analysis found that three of the largest oil and gas companies – ExxonMobil, Shell, and Chevron – spent more than $120 billion in 2013 in their efforts to boost output. More, the Journal notes, than it cost to put a man on the moon – and around a half trillion dollars in capital investment in the last five years.

Indeed, as the oil and gas industry endeavors to keep providing the low-cost energy that our economy and every economy worldwide relies upon, cost recovery measures such as those bemoaned by CAP are more important than ever. Calling for the repeal of provisions like the Section 199 manufacturing deduction or protections for dual capacity taxpayers intentionally ignores the realities of today’s energy sector.

The topline earnings numbers reported by the industry, moreover, are not a reflection of excessive profit margins or inflated returns. Rather, as we recently chronicled, return on investment in integrated petroleum companies is 11.7 percent, and 12.8 percent for producing companies. For all industrials, returns average 12.5 percent. The oil industry, then, is in line with all other sectors.

“Special” Tax Treatment: Section 199 and Dual Capacity

CAP’s line of attack – much like its allies in Congress and the White House – points to provisions like the Section 199 deduction and dual capacity protections as evidence of special tax treatment for the oil and gas industry. Ironically, their selection of these two provisions serves as evidence of quite the opposite: a proclivity on the part of a misinformed Beltway contingent to seek to single out this industry with punitive tax treatment.

Section 199 is not a taxpayer handout, and CAP’s assertion that the industry and its refiners don’t deserve the deduction is a rhetorical stretch. The deduction is freely applied to nearly 1/3 of all corporate activity in the United States. Film producers, software companies, renewable energy producers: they all take Section 199. But CAP rarely labels these groups as tax scofflaws, despite the fact that they take the deduction at a rate of 9 percent, while oil and gas companies are limited to a 6 percent deduction.

Far from an example of the industry’s preferential treatment, the domestic manufacturing deduction is an example of a tax policy that has already punitively singled out the oil sector in a negative and costly manner.

Proposals to alter dual capacity rules, meanwhile, are similarly and terminally flawed. CAP – along with the President – would seek to disallow oil and gas companies from taking a credit for taxes paid to a foreign government. Without this credit, American oil companies producing overseas would face a tremendous financial disadvantage, and a drastically higher tax rate.

Until the United States reforms its outdated “worldwide” system of international taxation, protections for dual capacity taxpayers are essential to American competitiveness. Dual capacity protections do not amount to a subsidy for American producers operating overseas. They serve to even the playing field for American companies seeking to keep pace with foreign – often state-owned – competitors that do not face the same onerous international taxation regime as American companies.

The rules as written have helped American producers grow and create jobs – but they are far from a subsidy. Repealing or modifying them, however, would simply make it easier for foreign competitors to gain access to the resources at the expense of U.S. companies.

An Attack on Exports

Also buried in the CAP piece is an attack on energy exports – an attack that is rooted in the claim that exports “could raise gasoline prices.” Exports and taxes are two very different policy debates, but CAP’s line of reasoning concerning this issue is no less misguided. Consensus is growing – on both sides of the aisle – regarding the prospect of American crude oil and LNG exports. From the Department of Energy to leaders on Capitol Hill, there is a recognition of the benefits that global exports can provide to our economy – from stabilized domestic production to job creation. As for the impact on gas prices? On the very same day that CAP posted their piece, Resources for the Future released a study indicating that lifting the export ban may in fact reduce prices at the pump.

CAP references data from Barclays in asserting that exports would press consumer prices upward. But their data is outdated and not reflective of the opinion of Barclays at large. Analysts from elsewhere within Barclays released a new assessment just yesterday indicating that, in fact, they expect that the consumer will benefit from lifting of export bans thanks to enhanced refinery efficiencies.

Conclusion

The latest CAP attack is, regrettably, more of the same politically charged venom that we have come to expect in recent years. But while the CAP message has stagnated, the energy debate has evolved. The oil and gas industry sports the highest average effective tax rate on the S&P index. The sector supports 10 million jobs, and continues to create new jobs at a breakneck pace.

It’s time to move past talking points and start dealing in facts.

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